A Look at The BRICS Part IV: China’s Economic Woes

China, is the world’s second largest economy in terms of GDP. The country, as featured in our earlier part series, has maintained the highest economic growth rate over the last decade amongst the BRIC countries. Its initial “C”, may appear the last one, in the four letter word; but according to statistics, China leads the way, in terms of economic prospects.

However, the world’ most populated country is facing challenges of its own that are threatening its dream of becoming the world’s greatest economy, ahead of the U.S; although, some reports indicate that China, has actually overtaken the U.S.

Nonetheless, China has been undergoing tough economic times, owing to the current euro zone crises. According to Forbes, Europe accounts for 20% of China’s exports, and as of December 2011, the Asian economy had already started exhibiting effects from the deteriorating euro zone market performance.

In march this year, China’s 2012 projected GDP was revised downwards to 7.5%, and according to the latest results, the reduced forecast may turn out to be nearly a perfect prediction. This would be, an under-performance from last year’s projection of 8.9%, as depicted in the chart below, courtesy of Forbes.

China has been switching gradually, from the centrally planned economic system, to a market oriented system, and this has been a major contributor toward its 2010 achievement, which saw the country become the world’s greatest exporter. Additionally, the country has been phasing out collectivized agriculture, to gradually liberalized prices and fiscal decentralization.

With such a high population, China boasts availability of a labor force and domestic market, as one of its major sources for economic growth. According to CIA.gov data, 36.7% of the country’s labor force is based on the agricultural sector, while 28.7% work in the industrial sector. The 2008 estimate also indicates that, 34.6% are based in the services sector.

Furthermore, the country has also sought to increase autonomy for state enterprises, and creation of a diversified banking system, which includes development of stock markets, opening of foreign trade and investment, and rapid growth of the private sector. These are some of the key reforms that have helped China, become world’s biggest exporter, as well as, earning it a position in Goldman Sachs Group, Inc. (NYSE:GS)’s BRIC economies.

In a bid to boost, what the country describes as economic security, China has moved to support state-owned enterprises in sectors it perceives critical to its efforts in nurturing globally competitive national champions, notes CIA.gov.

The National Bureau of Statistics of China indicates that the country’s GDP grew at an overall rate of 7.8%; with the primary industry performing poorly, after it grew by a mere 4.3%. The secondary Industry was the best of the trio at 8.3%, while the tertiary industry followed closely at 7.7%. Additionally, the Quarter against Quarter growth rates, indicate huge declines from 2011 achievements, with Q1 of 2012, falling behind by by more than 27%, while the second quarter fell by 25%, when compared to same periods last year.

Last week, the Chinese premier came out to dismiss immature speculation that the country’s economy was back on track, after it had announced promising results the previous month. The country announced in June, the possibility of an economic recovery, illustrated by a three year low inflation rate of 3%, and interest rate cuts, reports CNN money.

However, Wen Jiabao, the country’s premier, has moved to allay the high expectations saying, “we should be clear that China’s economic rebound is not yet stable, and economic hardship may continue for a period of time.” People are excited at the fact that, the country’s economy grew by 7.8%, overriding its 2012 projection of 7.5%, set in March this year, after adjustment to reflect current global economic meltdown.

China’s consumer price index (CPI)rose 2.2% to settle at 102.2 for the month of June, while the country’s and world’s greatest leading lender by market value, Industrial and Commercial Bank of China (SHA:601398) (HKG:1398), jumped 2.8 percent in Hong Kong, reported Bloomberg.

The Chinese stock market has tanked by any, and every measure. iShares FTSE/Xinhua China 25 Index (NYSE:FXI) is a popular ETF, which tracks China’s largest companies. Over the past five years, FXI is down close to 25%. Since October 2007, FXI is down 50%.

iShares MSCI Hong Kong Index Fund (NYSE: EWH) tracks companies which trade on the Hong Kong Exchange. EWH, has performed slightly better than FXI. Over the past five years, EWH is down 5%. Since October 2007, EWH is down close to 25%.

Investors are clearly not bullish about the Chinese economy, or the stock market.